Daily Mortgage Market Information

Mortgage investors are putting the finishing touches on their risk management positions this morning before largely slipping out early this afternoon for what promises to be a very nice last weekend of summer for much of the country.

The Labor Department released its August Consumer Price Index data earlier this morning – and mortgage investors yawned.  The headline measure of inflation at the consumer level showed a gain of 0.3% last month – slightly stronger than expected – but that gain was offset by the unexpectedly flat reading for the more important core component of the index (a value which excludes volatile food and energy costs).   The year-over-year rate of both headline and core consumer price inflation remains stable at 1.0% -- a condition that sharply reduces the likelihood of a pronounced and sustained upward move for mortgage interest rates – at least in the near-term. 

Looking ahead to next week the Federal Open Market Committee will huddle for a one-day monetary policy strategy discussion on Tuesday, September 17^th.  Central bankers will weigh their diverging views on the how the economy is likely to perform next year and will debate their respective theories on how best to re-fire the nation’s economic engines.  When they release their post-meeting statement at 2:15 p.m. ET it will likely reveal the Fed chose to remain on the sidelines and watch a bit longer before taking any form of action.  Such an outcome is already priced into the mortgage market -- so if this assessment proves accurate -- the Fed meeting will be a nonevent with respect to the current trend trajectory of mortgage interest rates.   

News from the housing sector will dominate the balance of next week’s economic calendar – ranging from Tuesday morning’s August Housings Start and Building Permit numbers through the existing and new home sales data on Thursday and Friday respectively.  The collective story is expected be one of almost imperceptible improvement – a condition not likely to cause mortgage investors to aggressively push mortgage interest rates notably higher.   

For the remainder of the day look for mortgage interest rates to take their directional cue from trading action in the stocks markets.  Higher stock prices will tend to draw mortgage interest rates fractionally higher.  With mortgage note rates currently floating either at, or within a breath of their all-time historical lows, falling stock prices will not likely serve to push these note rates appreciably lower – though mortgage investor pricing may improve a little.  From a technical perspective I continue to see reasons to believe the Dow will probably put in a multi-day high between 10550 and 10650 -- perhaps before the close of trading today. 

Daily Mortgage Market Information

The credit market is undergoing a technically driven adjustment this morning as last week’s $67 billion of Treasury obligations and the biggest supply of long-dated corporate debt issues since last March are redistributed by primary dealers and big-money center banks.  Risk management strategies established prior to the deluge of supply washed into the credit markets last week are being reversed this morning as well – contributing in part to the early rally in the Treasury and mortgage-backed securities markets.

The mood of mortgage investors is changing as they sweat out their recent security purchases made at, or very near all-time historically high prices.  From this point forward economic news that proves to be “less-bad” than expected will likely produce a much stronger move by investors to push prices down and note rates higher as they scramble to avoid the financial pain that will be inflicted on those caught holding a portfolio of low note-rate mortgages should the macro-economic news show potential improvement.

The slightly elevated August Retail Sales figures expected from the Commerce Department at 8:30 a.m. ET tomorrow have already been priced into the mortgage market.  The modest improvement in the ex. auto component of this report was likely driven almost exclusively by back-to-school discounts from businesses and the impact of tax-free holidays in seventeen states designed to support retail sales.  Mortgage investors will probably view this data as too distorted to provide a real sense of the current level of domestic consumerism.  If so, this report will not likely influence the direction of mortgage interest rates one way or the other tomorrow.  In the unlikely event the August Retail Sales figures exceed the consensus estimate -- look for investors to respond by pushing prices lower and note rates higher before the end of Tuesday’s trading session.  

Daily Mortgage Market Information

The credit market is undergoing a technically driven adjustment this morning as last week's $67 billion of Treasury obligations and the biggest supply of long-dated corporate debt issues since last March are redistributed by primary dealers and big-money center banks.  Risk management strategies established prior to the deluge of supply washed into the credit markets last week are being reversed this morning as well - contributing in part to the early rally in the Treasury and mortgage-backed securities markets.

The mood of mortgage investors is changing as they sweat out their recent security purchases made at, or very near all-time historically high prices.  From this point forward economic news that proves to be "less-bad" than expected will likely produce a much stronger move by investors to push prices down and note rates higher as they scramble to avoid the financial pain that will be inflicted on those caught holding a portfolio of low note-rate mortgages should the macro-economic news show potential improvement.

The slightly elevated August Retail Sales figures expected from the Commerce Department at 8:30 a.m. ET tomorrow have already been priced into the mortgage market.  The modest improvement in the ex. auto component of this report was likely driven almost exclusively by back-to-school discounts from businesses and the impact of tax-free holidays in seventeen states designed to support retail sales.  Mortgage investors will probably view this data as too distorted to provide a real sense of the current level of domestic consumerism.  If so, this report will not likely influence the direction of mortgage interest rates one way or the other tomorrow.  In the unlikely event the August Retail Sales figures exceed the consensus estimate -- look for investors to respond by pushing prices lower and note rates higher before the end of Tuesday's trading session.   

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Daily Mortgage Market Information

The Labor Department announced this morning that the number of Americans standing in line to file first time claims for unemployment benefits dropped by an unexpected 27,000 during the week ended September 4^th.   Last week's apparent improvement in the story from the labor sector sent mortgage investors racing to drop prices and nudge up note rates as a few rays of light filter though the darkness of their recessionary thinking.  

As they say, the devil is in the detail - and in this case more than a few investors may choose to rethink their earlier decision to sell mortgage-backed securities aggressively this morning after they take the time to read the initial jobless claims report more closely.   

It is worth noting that the Labor Department was quick to point out because of the Labor Day Holiday, nine states - including California - failed to file their jobless claims reports by the Labor Department's deadline - so government data wonks simply plugged in guesstimates for those non-reporting states.  Once those states actually get around to filing their jobless numbers with the department - the jobless claims revisions over the next two weeks could be larger than normal. 

Even assuming no revisions, 451,000 initial claims last week falls far short of indicating a recovery has begun in the labor market.  Until/unless the total number of workers filing first-time unemployment claims drops below 400,000 on a multiple-week basis will it be reasonable to suggest the employment picture has brighten notably. 

As it currently stands nearly 10 million people are drawing some form of unemployment benefit from the government - and several million more have exhausted their claims and now have no benefits at all.  The "so what" factor here is dramatic - were the country gripped by a major recession and simply operating at what might be described as normal conditions - 2 million to 4 million people would be expected to be drawing unemployment insurance benefits.   It is painfully obvious we still have a long way to go before the worst job market conditions since the Great Depression show notable signs of improvement.

Today's 30-year bond sale is the last of Uncle Sam's three debt auctions on tap this week.  In light of this morning's better-than-expected news from the labor sector some market participants are concerned demand may not be strong enough to avoid the necessity of Uncle Sam "sweetening the pot" by accepting lower prices for these securities to attract the required capital.  Should today's auction be more aggressively bid than most observers now anticipate - the chance for a little "relief" rally this afternoon in the mortgage market will improve dramatically. 

Daily Mortgage Market Information

Mortgage investors are standing around with their hands in their pockets this morning while they await the result of the Treasury Department's $21 billion 10-year note auction. 

Today's 10-year note sale is the second of three auctions on tap this week. Some market participants are concerned demand may not be strong enough to avoid the necessity of Uncle Sam "sweetening the pot" by accepting lower prices for these securities to attract the required capital.  Those concerns are probably misplaced - at least this time around.

The potential for a return of the sovereign European debt crisis to front page news is likely sufficient to drive significant amounts of international investors into the relative safe-haven of today's 10-year note offering.  If so, this event will likely have little direct influence on the trend trajectory of mortgage interest rates.    Should today's auction be more aggressively bid that most observers now anticipate - the chance for a little "relief" rally this afternoon in the mortgage market will improve dramatically.  I am not necessarily expecting any developing rally in the mortgage market today to recover all of the slump we've experienced so far this morning (Fannie Mae 4.0% 30-year down 9/32^nds as I write) but it might come close to cutting the price loss so far today in half.  The 10-year note auction will conclude at 1:00 p.m. ET and I'll post the results on my website as soon as possible once the final gavel falls.

As they do every Wednesday, the Mortgage Bankers of America have release their mortgage loan application index for the week ended September 3^rd.  According to the MBA the overall number of mortgage applications drooped 1.5% -- with refinance requests slumping 3.1% while the purchase loan demand improved by 6.3%, marking the largest gain for this component of the overall index in more than three months.  Refinance requests once again accounted for four out of every five loan applications for the week.     

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Daily Mortgage Market Information

Judging by the early trading action in the mortgage market this morning -- investors seem to be indicating they where perhaps a little too aggressive with their response to last Friday's better-than-expected news from the labor sector.  The August nonfarm payroll was certainly not as bad as many had anticipated - but it certainly was not good enough to suggest a period of robust job growth is just around the corner. 

Renewed concerns regarding the potential redevelopment of a sovereign debt crisis in Europe together with a change in investors' thinking regarding the domestic economy has created a "flight-to-quality" buying spree that is packing enough financial firepower to be supportive of steady to fractionally lower mortgage interest rates today. 

This afternoon's $34 billion 3-year note sale to be conducted by the Treasury Department should draw solid demand given the current market environment - rendering the event essentially "toothless" with respect to its potential impact on the trend trajectory of mortgage interest rates.  

Daily Mortgage Market Information

The mortgage market has had a terrific rally over the past month or so - with the contract rate for 30-year fixed-rate mortgages moving to a new all-time low.  While historically low mortgage interest rates are good news for borrowers and mortgage originators - it is nervous news for mortgage investors since the price of the underlying mortgage-backed securities these investors are currently buying has just touched an all-time record high. 

The growing for these buyers of mortgage-backed securities is that they will be caught holding the bag should the great rally in the mortgage market come to a sudden and screeching halt.  In order for current buyers of mortgage securities to make a profit on their just completed transactions - by necessity they will have to find a ready, willing and able party eager to pay an even greater price for the same security.  If this "greater fool" is nowhere to be found - current mortgage investors will quickly realize they have made a major financial blunder -- and will immediately begin scrambling to unload their mortgage assets as quickly as possible to minimize the financial pain. The more selling pressure this activity creates -- the more desperate sellers will become and the harder it will be to find buyers - a scenario, should it develop, marked by surging note rates. 

Mortgage investors will be keenly attuned to tomorrow morning's August nonfarm payroll data.  If the headline payroll number matches or exceeds the consensus estimate for a loss of 100,000 jobs -- and/or the national jobless rate creeps up 9.6% or higher -- mortgage investors will breathe a sigh of relief as mortgage interest rates trade steady to fractionally lower.  Should the August nonfarm payroll report indicate 75,000 or fewer jobs were lost during the month -- and/or should the national jobless rate post a reading of 9.5% or lower -- the race for the market exists will be on - with mortgage interest rates moving higher and prices slumping sharply lower.  This latter scenario carries a lower probability of actually occurring - though not so low that it can be discounted completely.    

Daily Mortgage Market Information

The Institute of Supply Management's Manufacturing Index showed surprising strength last month.  This measure of activity at the nation's factories rose from a reading of 55.5 in July to 56.3 for August.  The modest gain bucked investors' expectations for a gain in the very low 50's.  The data suggests conditions in the manufacturing sector held up much better than anticipated last month.  The manufacturing sector has now expanded for 13 straight months -- though the pace of growth has slowed noticeably during the last quarter.  The ISM August data is at odds with recent regional reports from the Federal Reserve showing a far more notable slowdown in the manufacturing sector.   It appears investors decided the mixed message with respect to activity levels at the nation's factories warrants the use of a "better-safe-than-sorry" pipeline risk management strategy this morning - an event that has created the move to lower rate sheet prices in today's early going. 

 The survey for the week showed all mortgage applications edged 2.7% higher on a week-over-week basis.  The refinance index climbed 2.8% while the purchase index showed a gain of a more modest 1.8% for the week.  Refinance applications accounted for about 83% of all applications and more than 80% of the prospective loan volume.